Inflation misses across the world fuel central bank debates

Bloomberg

With so many central banks failing to hit their inflation targets, some are considering changes to the tool kits they use to steer their economies. Norway’s decision to lower its price target is just the latest example, and follows more or less official adjustments in Sweden, Argentina and the euro area. Even in New Zealand, the birthplace of inflation targeting, the central bank is shifting to a broader goal that includes a focus on employment.
But there’s no one-fits-all solution for monetary authorities and debate is splintered. Raising inflation targets has been discussed equally intensively in recent years as reducing or amending them. And while some central banks acknowledge a need to reconsider their mandates, others are doubling down on existing policies.
Claudio Borio, a top official at the Bank for International Settlements, poured fuel on the debate in September with a provocative speech calling for a broad rethink that accounts for how globalization and technological advances have influenced inflation.
US
Federal Reserve officials have been talking about operating regimes for years, and the discussion continues as the central bank struggles to reach its 2 percent inflation target, which it has missed for most of the past five years. Core consumer-price gains in February are due at 8:30 a.m. eastern time and are expected to come in at 1.8 percent.
In January, a couple of Fed officials discussed expressing the inflation target as a range instead of a point estimate, while others suggested the policy committee examine price-level targeting, meeting minutes show. Price-level targeting has support from John Williams, president of the San Francisco Fed, who called it a “powerful way to cope with zero lower bound.”
EURO AREA
While ECB policy makers have faithfully stood by their price-stability target throughout the crises that hit the 19-nation euro area in the past decade, they have allowed themselves more time to reach their goal. The medium-term horizon in which headline inflation is envisaged to hover below but close to 2 percent — once understood to cover 18 to 24 months — has lengthened to somewhere between 3 to 5 years.

UK
The Bank of England has also been flexible when it comes to meeting its target, which is 2 percent. It’s looked through large deviations in the past that have been caused by factors such as sharp currency moves, and recently lengthened its policy horizon temporarily to allow it provide monetary support to the economy.

NORWAY
Norway this month made the first changes to its framework in 17 years, lowering the inflation target to 2 percent from 2.5 percent. This brings it in line with the target of other central banks and is a reasonable step because the massive inflow of oil revenue into the economy will start abating, the government argued.

JAPAN
Governor Haruhiko Kuroda has repeatedly pushed back the the time frame for hitting the Bank of Japan’s 2 percent inflation target that was adopted in 2013 after years of deflation. That has stoked debate in two ways: some critics say the target is too high while supporters say the unprecedented stimulus unleashed since Prime Minister Shinzo Abe came to office will eventually push prices higher.

INDIA
The RBI formally adopted a new policy mandate in early 2015 to keep inflation over the medium term at 4%, within a 2 percentage point range either side. A six-member committee, comprised three central bankers and three external economists meet every two months to decide on rates. The RBI’s inflation model consists of four variables: the output gap, the Phillips curve that assesses the impact of unemployment, the Taylor rule for short-term interest rates that also guides several global central banks, and interest rate parity through exchange rates.

AUSTRALIA
The Reserve Bank of Australia has a dual mandate of maintaining stability of the currency and full employment. Both support its over-arching goal of inflation averaging between 2 percent and 3 percent over time. Governor Philip Lowe has all but ruled out further reducing interest rates in order to speed up inflation’s return to target.